Biden’s risky agenda brings return of big government

Joe Biden’s great social and financial experiment is set to transform the US in possibly unpredictable ways that pose great risks for the global order and world economy. The beacon of free enterprise is being steered down a more European path of higher taxes, enhanced social welfare benefits and big government. No one can dispute that the US could benefit from a boost to well-targeted infrastructure spending. But Mr Biden’s agenda is to rebalance the US economy to higher spending on environmental protections, childcare, education and affordable housing.

Meanwhile, the corporate state of big tech, big green and the billionaires club members who financially have benefited most from the pandemic are lining up with the Biden presidency to make a further killing. Mr Biden has pulled back from reforms proposed by Donald Trump that potentially would make tech firms liable for what they publish and distribute.

A federally backed “green” bank is being established to finance renewable energy projects and hasten the Green New Deal. The climate change agenda, loaded with good intentions but no obvious strategy for success, could turbocharge a transfer of wealth that could sow the seeds for political revolt by ordinary Americans. The scale of the Biden agenda is revealed in Friday’s $US6 trillion ($7.75 trillion) budget. The administration’s first budget, for the fiscal year beginning October 1, will put the US on a path to spend $US8.2 trillion annually by the end of 2031. Debt would exceed the record level at the end of World War II in a few years and reach 117 per cent of economic output by the end of 2031, up from about 100 per cent this year. The plan relies on the sort of assumptions that have allowed Josh Frydenberg to expand domestic borrowings.

The new economic orthodoxy is that if growth exceeds interest rates, a build-up of debt does not matter. US officials say sharply higher taxes on corporations and the wealthy will generate enough revenue to offset higher spending within 15 years but will add to deficits in the meantime. They say borrowing to fund new roads, bridges and broadband will increase productivity, allowing faster growth without triggering inflation. The economic case for increased spending on welfare and social programs is not so clear. Like the Australian Treasurer, Mr Biden is taking a risk that higher taxes and low interest rates will offset the increased borrowings so the cost remains low in relative terms. The danger is that a return of inflationary pressures will force up interest rates and blow away the cosy budget assumptions. Financial markets are split on where inflation is going and what this will mean for interest rates and Wall St. The Biden budget plan will face scrutiny and certain opposition in the Senate but a new US economic direction is being set. As always, what happens in the US will quickly affect the rest of the world.

Washington correspondent Adam Creighton writes on Saturday that the direction being charted is for a return of big government, a conscious turnback from the pledge to get government out of people’s lives made by Democrat president Bill Clinton in 1996. Creighton argues that having failed to secure a big majority from Mr Trump, Mr Biden will struggle to fulfil his ambitions. The Democrats are expected to lose their slender grip on the House of Representatives in next year’s congressional election, leaving little time to achieve bipartisan agreement on the infrastructure bills. Their even slimmer one-vote hold on the Senate means more radical elements of the Democrat agenda, such as packing the Supreme Court, are even more unlikely to succeed. But the welfare gears already have been engaged by the pandemic and astronomical deficits and borrowings are continuing to grow. Banking on higher taxes in future to pay for the excesses of today has a poor track record of success.